Question Completion:
A purchasing agent for a particular type of silicon wafer used in the production of semiconductors must decide among three sources. Source A will sell the silicon wafers for $2.50 per wafer, independently of the number of wafers ordered. Source B will sell the wafers for $2.40 each but will not consider an order for fewer than 3,000 wafers, and Source C will sell the wafers for $2.30 each but will not accept an order for fewer than 4,000 wafers. Assume an order setup cost of $100 and an annual requirement of 20,000 wafers. Assume a 20 percent annual interest rate for holding cost calculations.
Answer:
Source B should be used.
Explanation:
a) Data and Calculations:
Total annual requirement of wafers = 20,000
Annual order setup cost = $100
Holding cost = 20% in annual interest rate
Sources of acquiring wafers:
Source A Source B Source C
Old offers:
Minimum units to be bought 1 3,000 4,000
Price at minimum $2.50 $2.40 $2.30
New offers:
Minimum units to be bought 1 3,000 out of business
Price at minimum $2.50 $2.55 N/A
Price after minimum N/A $2.25 N/A
Total cost of goods ordered from:
Source A = $50,000 ($2.50 * 20,000)
Source B = $45,900 ($2.55 * 3,000 + ($2.25 * 17,000))
Source B should be chosen as it provides the wafers at a cheaper total price than Source A.
